Economic policymakers deserve praise for their rapid response to the terrorist attacks almost two weeks ago.

The threat to the world's financial system was immediate, but close co-operation among central banks and the prompt provision of huge amounts of liquidity to financial institutions kept the system running smoothly. Once the potential effects of the attack on the global economy became clearer, central banks eased monetary policy in every large economy. In the US, where the economy was already extremely fragile, fiscal policy was also loosened. Congress released an additional $40bn, 0.4 per cent of US gross domestic product, to be spent on the recovery efforts in the US and counter-terrorism measures.

These judicious uses of policy levers will help to moderate the forces of recession. But the world's economy is still certain to contract in the months to come. So policymakers are under pressure to do more. In some areas, that might be right. But in many others, additional action is unwarranted and would be counter-productive.

The best tool for regulating demand and prices remains monetary policy. In the US, the Fed still has significant room for monetary loosening, even with interest rates at only 3 per cent. It should be ready to cut rates further. But it should wait for evidence of a further economic lurch downward and should certainly not act before its next scheduled meeting on October 2. An earlier move would signal panic and so undermine already shaky consumer confidence.

Demand management

The European Central Bank, the Bank of Japan and the Bank of England should also hold fire until new economic data appear.

Fiscal policy is a poor tool for demand management. Governments should ensure their structural public deficits are sustainable in the long term, which means close to balance. But there should be no constraints on the automatic stabilisers that reduce the amplitude of economic cycles. In a recession, tax revenues must be allowed to fall and public expenditure to rise.

The new spending in the US does not fundamentally alter its budgetary position, but there is precious little scope for further fiscal loosening. Indeed, government bond markets are already concerned that deficits will grow. The yield on 30-year US Treasuries has risen from 5.44 per cent on September 10 to 5.62 per cent on Friday. Lax US fiscal policy therefore threatens the effectiveness of monetary policy.

Consumer spending

Badly designed tax cuts or spending increases would be even worse. For example, now is not the time to reduce capital gains tax. That would only encourage investors to sell equities and may have little impact on consumer spending. Temporary tax breaks for business investment have also been shown to have negligible long-term impact. And public money used to bail out shareholders of the airlines would only delay desperately needed restructuring in the industry.

In the eurozone, the fiscal picture is complicated by the conditions of the Stability and Growth Pact. Countries should neither use the current crisis as an excuse for structural tax cuts or spending increases, nor should the Commission invoke any penalties if budget deficits breach the 3 per cent limit in the pact for cyclical reasons.

International economic policy also has limits. A debt default right now in Turkey or Argentina must be avoided because the threat of contagion would be extremely high. The International Monetary Fund must therefore stand ready to provide sufficient liquidity. But within a few weeks, if markets are calmer, such open-ended commitments must be avoided.

Policymakers are under enormous pressure to act decisively, so increasing the risk of knee-jerk reactions. Leadership must include rejecting many seemingly attractive schemes to help the economy. Bad policies remain so in a time of crisis.